Will Capitalism Survive its Growing Wealth Gap?

As we announced in our May Day issue, The Socialist is launching a series of articles, both in the quarterly magazine and in occasional articles in the TS Webzine, about the capitalist economy.

Questions we will investigate about capitalism include:

What the post-2008 economic and financial crisis means for working people;

How the SP Platform’s section, “Economics”, addresses immediate concerns; and

How the proposal of “social ownership of the means of production and distribution” may address root problems posed by capitalism.

Is there any point to paying attention to the economy?

Does capitalism have a built-in tendency toward accumulation of wealth in fewer and fewer hands? Can anything be done to correct such a tendency?

What does the post-2008 crisis point to in the future?

What is the “taxes and deficit” turmoil about?

Did banks create the 2008 crisis?

What were the roles of technology and globalization in this crisis?

Is an expansion of capitalism like that of the 19th and 20th centuries possible in the twenty-first?

What does the explosion of student debt tell us about the dynamics of capitalism, and about its future?

Are problems faced by working people due to dynamics of capitalism itself, or to mismanagement and biased government policies?

Do cooperatives and other forms of collective and democratic ownership offer a path out of the problems of capitalism?

Can government spending solve the problems of capitalism by stimulating consumer demand sufficiently to increase production and employment?

Can we observe an inherent downward tendency in the rate of profit under capitalism?

At whose service is economic theory?

Is stagnation, rather than growth, a new long-term norm in the capitalist economy?

Can re-regulation of the financial industry solve the problems that created the post-2008 crisis?

Do the economies of the world divide into imperialist (developed) and oppressed (prevented from development by imperialism)?

Is there an economic basis any more for massive political organizations of workers that seek an improved standard of living while making peace with capitalism?

Can racial and gender equality be won within the system of capitalism?

Do socialist and labor organizations need to develop and adopt a theory of capitalist and socialist economics?

What effects do climate change, and efforts to address it, have on the capitalist economy?

How have government, academic economists, and labor organizations addressed the post-2008 crisis? Have any of them offered effective solutions?

What explains “financialization,” i.e., the approximate doubling of the proportion of debt in the U.S. economy in the last 30 years?

What is a financial, housing, or high-tech “bubble”? Do bubbles endanger capitalism or help preserve it? What is their effect on working people?

Does war endanger capitalism, or preserve it?

What is the meaning of the tenfold expansion in the proportion of financial-industry debt in the last 40 years?

How do the Socialist Party USA platform and principles address the problems that the capitalist economy creates for working people?

How have socialist ideas about the capitalist economy evolved?

This series is envisioned as a collaborative work with different authors, with sometimes different perspectives. So far, none of those involved are professional economists – you who are, let us hear from you!

The Occupy movement that started in 2011 focused attention on the gap between the “1 percent,” who hold most wealth and power, and the “99 percent” who don’t. A book by Thomas Piketty, the French economist, has provided data and proposals to continue and to focus this discussion.

Piketty’s work has been widely acclaimed. He has spoken to the U.S. President’s Council of Economic Advisors and given a talk at the International Monetary Fund. What he writes is in tune with President Obama’s statement that inequality is “the defining challenge of our age.” It was the Occupy movement that changed the discussion in the U.S. after the 2008 financial collapse, from “How capitalism helps us all,” to “How capitalism divides us increasingly into haves and have-nots.” It was the Occupy movement that created an environment in which Thomas Piketty can be received like a rock star.

What does it say about our society when vast numbers of U.S. workers earn minimum wages that without subsidies would support only malnutrition and homelessness? When 95 percent of income growth from 2010-2012 went to the top 1 percent? When the top 1 percent owned 35 percent of all wealth in 2012, and the bottom 50 percent owned only 5 percent?

Economists during the Cold War predicted a favorable future for capitalism by pointing out that in the decades from before World War I to after World War II, i.e., from 1913 to 1948, the wealthiest 10 percent’s share of income in the U.S. fell by a third. Piketty has challenged the rosy picture of falling income inequality, showing that the top 10 percent today has a greater share of income than before World War I – erasing all gains made for equality since what was called the “Gilded Age” and now erasing illusions that capitalist growth is a “rising tide that raises all boats.”

Piketty’s focus is the relationship between wealth and the rate of return earned by capital – roughly the profit rate – to economic growth. What he finds is that workers’ wages grow more slowly than income from investment, most of which is income of rich persons. Hence the wealth gap widens.

For him, “the central contradiction of capitalism” is the tendency of wealth inequality to rise in periods when the rate of economic growth is lower than the rate of return on capital.

His remedy is a political measure that consists of a worldwide tax on wealth. Since the wealthiest people will pay this tax disproportionately, wealth inequality will be reduced.

Income and wealth inequalities are survival risks for working people, who can less and less afford decent homes and educational experiences. But today, the wealth gap endangers capitalism itself, which relies on the support of the workers and on growing consumer demand to drive production and profit. Who will deeply believe in a system that reveals itself to impoverish millions more every year? How can the housing industry thrive when the number of new home buyers has fallen by half? What young person can buy a home or sufficient other goods to grow the economy, when already burdened by tens or hundreds of thousands of dollars in education debt?

Concentration of wealth, side by side with the impoverishment of millions, is a result of a capitalist economic system that relies increasingly on the “stimulus” of investment “bubbles,” and indebtedness and speculation by the financial industry; that relies on monopolistic corporations’ control of energy resources; that relies heavily on war. We will discuss these aspects in future parts of this series.

Intimately connected to, and part of, wealth inequality is the rising burden of debt carried by working people; to get net wealth, we subtract debt from assets. Massive numbers of working people actually have negative wealth, because their debts amount to more money than their assets. Moreover, the burden of debt has risen hugely in the last few decades, a fact felt by most recent college graduates.

For an understanding of this, we need to turn to sources other than Piketty, who does not discuss the indebtedness of working people separately. His index entry for “Debt” reads, “See Public debt.” Public debt is what governments owe.

The U.S. economist Richard Wolff has written extensively for many years about working-class debt, and some of his work appears in his 2011 book, “Capitalism Hits the Fan.” He reports that from 1974 to 2004, the total value of mortgages and consumer debt (credit cards, car loans, etc.) rose from $627 billion to $9.7 trillion – a factor of 15. If people must cut back their life plans, and must work harder for a lower standard of living, it is partly because their debt obligations have multiplied enormously.

How did this happen? Wolff explains that wage income – what workers could afford to buy with a week’s pay – fell in the same period, 1973-2005, by 6.5 percent. This was while productivity – what workers produced hourly – rose by 75 percent. The reduction in real wages reversed the upward wage trend from World War II to 1975, which was a 75 percent rise in real wages. It was based on the 1945-1975 experience that many workers learned to believe in capitalism as a system that was good for them.

To maintain their standard of living in a consumer culture, Wolff explains, working people in the U.S. from the 1970s on increased their work weeks – many women entering the job market and both women and men increased their hours and borrowed massively, taking out home equity loans as the valuation of real estate rose and taking multiple credit card accounts. The resulting stress of overwork and declining wealth explains the rise in substance-abuse problems and every other kind of escapism, as well as problems in education and problems of depression for working people.

Who benefited from the fast-rising productivity of workers, the lowering of workers’ standards of living, and the growing indebtedness of working people? The wealthy. Why are the wealthy accumulating more and more wealth rather than spending it? Because no matter how fast they try to spend it on luxuries, the wealth keeps pouring in at a greater rate. That is capitalism in the 21st century. We’ll return to Wolff’s writing in this series.

Why is Thomas Piketty invited to speak before 1 percent-oriented policy makers, such as the Council of Economic Advisors and the International Monetary Fund? Possibly it is because the gigantic disparity of wealth, combined with a falling standard of living for stressed-out working people – threatens a social explosion. The wealthy may see an uprising of working people ahead that would make the Occupy movement look tiny by comparison. They may hope that economists can offer suggestions about how to avoid it. Whether such an explosion can be avoided, or resolved, within capitalism, is one of the topics we’ll investigate in future articles in this series.

The Socialist Party USA Platform has for years called for a $15 minimum wage and a full employment policy with a guaranteed livable annual income, with steeply graduated taxation, and social ownership of a democratically controlled financial system. Today the $15 proposal has been enacted in Seattle for most workers. In future articles, we’ll investigate the degree to which reforms can solve workers’ problems under capitalism and the degree to which strictly socialist proposals can overcome the limitations and irrationalities generated by the capitalist system.